The Pros and Cons of Reverse Mortgages

June 20, 2022

When it comes to reverse mortgages, there is the good, the bad and the ugly. If you are considering a reverse mortgage on your home, it is important to be informed to make the right decision.

What is a Reverse Mortgage?

A reserve mortgage involves borrowing money against the equity in your home, whether you have the majority or all of it paid off. Interest accumulates over time; however, with a reverse mortgage, the loan doesn’t need to be paid off until you sell or pass away. Then, any interest is added to the loan balance. If the borrower dies, the estate must pay the mortgage.

What Are the Pros and Cons of Reverse Mortgages?

There are pros and cons to a reverse mortgage that need to be weighed by each borrower. You should also be aware that there are scams related to reverse mortgages.

Pros

  • A reverse mortgage may allow you to stay in your home.
  • Use it to pay off an existing mortgage - freeing up funds for living expenses.
  • You don’t have to make payments until after you move out of the house or pass away.
  • If the value of your home falls below the reverse mortgage amount, you will only have to repay the amount equal to your home value.
  • You don’t pay tax on the money you borrow.
  • Many reverse mortgages don’t have income requirements.

Cons

  • Reverse mortgages come with additional costs, including origination fees and mortgage insurance.
  • Interest rates are higher than most other types of mortgages
  • Borrowers end up owing more because interest accrues rather than the loan being paid off over time.
  • It can reduce your family’s inheritance from your estate.
  • Missing a property tax payment, not maintaining the home, etc.— may force you to pay off the mortgage early or it can result in default and even foreclosure.

Are There Reverse Mortgage Scams?

While each individual has to weigh the pros and cons of a reverse mortgage, they also have to be on the lookout for scams. Reverse mortgage scams target seniors who need financial assistance to cover living expenses.

Illegal Information Fees

There are fees applied like with any other type of loan or financial assistance, such as appraisals, legal, closing, and administrative fees. However, scammers will charge a “fee” just for providing information about their reverse mortgage products.

Property Title Transfer

Scammers can artificially inflate the value of an individual’s home or simply convince them that their home is worth more than it actually is. When a senior feels that they can get more money for their home and they are grateful to the scammer, they can be easily convinced to transfer the property title.

Document Fraud

Often scammers will pretend to be from a financial institution and request that seniors send documents and money to help with the reverse mortgage approval process. However, when it comes to a legitimate reverse mortgage, all documentation or fees are handled after the loan is approved.


Like any other type of loan or financial product, it is important to look into the conditions of a reverse mortgage and determine if it works well for your situation. You should also be aware of anything that seems suspicious and may indicate it is a scam.


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